Principios de la Economía

• The following notes cover key economic principles, models, and concepts.

Ten Principles of Economics

• Economics involves making decisions with resource constraints.
• Trade-offs exist between efficiency and equity.
• The cost of something is what you give up to get it (opportunity cost).
• Rational people think at the margin, making small, incremental adjustments to plans.
• People respond to incentives; both costs and benefits influence behavior.
• Trade can make everyone better off by allowing specialization.
• Markets are usually a good way to organize economic activity.
• Governments can sometimes improve market outcomes, particularly when there are market failures.
• The standard of living depends on a country's production of goods and services.
• Prices rise when the government prints too much money (inflation).
• Society faces a short-run trade-off between inflation and unemployment (Phillips Curve).

The Invisible Hand

• Personal interests can drive the economy.
• Interventions from the government can affect markets.

Economic Models

• Economic models are simplified representations of complex realities used to analyze economic situations.

Circular Flow Diagram

• The circular flow diagram illustrates how money moves through society.
• In the model, money flows from producers to households as wages and flows back to producers as payment for products.
• Firms produce and sell goods and services.
• Firms hire and use factors of production.
• Households buy and consume goods and services.
• Households own and sell factors of production.

Production Possibilities Frontier (PPF)

• The PPF is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
• Points on the PPF are efficient.
• Points inside the PPF are inefficient.
• Points outside the PPF are impossible given current resources.
• An outward shift of the PPF represents economic growth.
• Shifts can occur due to increased availability of resources or technological advancements.
• A shift can be specific to one good or can affect the production of both goods.

Positive vs. Normative Statements

• Positive statements are descriptive and describe the world as it is.
• Normative statements are prescriptive and describe how the world ought to be.
• "Inflation in Chile increased by 2% in April" is a positive statement.
• "The increase of taxes should be allowed," is a normative statement.

Supply and Demand

• Market: A group of buyers and sellers of a particular good or service.
• Supply and demand are the forces that make market economies work.
• Supply refers to the quantity that sellers are willing and able to sell.
• Demand refers to the quantity that buyers are willing and able to purchase.

Supply

• Quantity supplied is influenced by the price of inputs, technology, and the expectations of sellers.
• An increase in price leads to increase in quantity supplied; positive relationship.
• The supply curve shows the relationship between price and quantity supplied.
• The market supply curve is the sum of all individual supplies for a particular good or service.
• The curve shifts if there are changes in input prices, technology, or expectations.

Demand

• Quantity demanded is influenced by factors such as income, prices of related goods, tastes, expectations, and the number of buyers.
• An increase in price leads to a decrease in quantity demanded; negative relationship.
• This is also the "law of demand."
• The demand curve illustrates the relationship between price and quantity demanded.
• The market demand curve is the sum of all individual demands for a particular good or service.
• The curve shifts if there are changes in income, prices of related goods, tastes/preferences, expectations, and number of buyers.

Market Equilibrium

• Equilibrium is where supply and demand intersect; quantity supplied equals quantity demanded.
• The equilibrium price is the price that balances supply and demand.
• Surplus occurs when quantity supplied exceeds quantity demanded.
• Shortage occurs when quantity demanded exceeds quantity supplied.

Microeconomics and Macroeconomics

• Microeconomics is the study of how households and firms make decisions and interact in markets.
• Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

Specialization

• Specialization is the use of resources more efficiently to produce more goods.
• Absolute advantage exists when one can produce a good using fewer inputs.
• Comparative advantage refers to the ability to produce a good at a lower opportunity cost.

Elasticity

• Elasticity measures responsiveness of quantity demanded or supplied to a change in its determinants.
• Price elasticity of demand measures how much the quantity demanded responds to a change in price.
• Inelastic demand means quantity demanded responds slightly to price changes (necessities).
• Elastic demand means quantity demanded responds substantially to price changes (luxuries).

Factors Influencing Price Elasticity

• Availability of close substitutes (more substitutes, more elastic).
• Necessities versus luxuries (necessities are more inelastic).
• Definition of the market (narrowly defined markets are more elastic).
• Time horizon (demand is more elastic over longer time horizons).

Calculation of Elasticity

• Percentage change in quantity demanded divided by percentage change in price.
• Midpoint method is used to provide more accurate elasticity calculations.

Types of Demand Curves

• Perfectly inelastic: elasticity = 0 (vertical demand curve).
• Inelastic: elasticity is less than 1.
• Unit elastic: elasticity = 1.
• Elastic: elasticity is greater than 1.
• Perfectly elastic: elasticity is infinite (horizontal demand curve).

Price Ceilings and Floors

• A price ceiling is a legal maximum on the price at which a good can be sold.
• A price floor is a legal minimum on the price at which a good can be sold.
• A price ceiling above the equilibrium price is not binding or effective.
• A price ceiling below the equilibrium price creates a shortage.
• A price floor below the equilibrium price is not binding or effective.
• A price floor above the equilibrium price creates a surplus.

Surpluses

• Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays (measures the benefit buyers receive).
• Producer surplus is the amount a seller is paid for a good minus the seller's cost of providing it (measures the benefit sellers receive).
• Total surplus is the sum of consumer and producer surplus; represents the total welfare in a market.

Profits

• Total revenue is the price of the market times the quantity sold.
• To calculate the revenue, multiply selling price with the number of units sold.
• Economic profit considers both explicit and implicit costs.
• Profit is total revenue minus total cost.

Costs

• Total cost is the market value of the inputs a firm uses in production.
• Fixed costs do not vary with the quantity of output produced.
• Variable costs do vary with the quantity of output produced.
• Total cost equals fixed cost plus variable cost.
• Average total cost is total cost divided by the quantity of output.
• Average fixed cost is fixed cost divided by the quantity of output.
• Average variable cost is variable cost divided by the quantity of output.
• Marginal cost is the increase in total cost that arises from an extra unit of production.

Competitive Market

• Many buyers and sellers participate in a competitive market.
• The goods offered for sale are largely the same.
• Companies can freely enter or leave the market.
• A competitive market is a market structure in which many firms sell a homogenous product

Maximizing Profit

• Profit is maximized when marginal revenue equals marginal cost.
• This is where the production quantity would equal.

Supply Curve

• The supply curve is determined by the marginal cost curve in perfect competition.
• In the short run, the supply curve is where marginal cost is above average variable cost.
• In the long run, the supply curve is where marginal cost is above average total cost.

Monopolies

• Single seller controls the market.
• Barriers to entry prevent competition.
• This could be the key for a specific resource, or when there is a patented item.